QCDs & State Tax Credits: a free lunch?

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Phil DeMuth
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QCDs & State Tax Credits: a free lunch?

Post by Phil DeMuth »

There appears to be a small free lunch for tax-sensitive investors.

Some states offer a state tax credit in exchange for donating to specified registered charities in their state. Provided the tax credit quid pro quo is less than 15% of the total charitable contribution, my understanding is that it can be fulfilled by making a Qualified Charitable Distribution from your IRA.

This works well in cases where the state has a dollar limit on the tax credit -- say, $800.

Example 1: By donating $5,340 to the correct charity as a QCD, you would collect the state tax credit and be able to treat the entire $5,340 as a valid QCD on Form 1040 (because $800 is < 15% of $5,340).

Example 2: If you donated $1,000 as a QCD in the above state, you would still get the $800 state tax credit, but because that is over the 15% kickback rule, the QCD would be disallowed. You would end up reporting the $1,000 as a taxable IRA distribution on Form 1040, and then only get to deduct $200 (the amount over the $800 in value you received back from the state) as a Schedule A charitable contribution.

Is this right or wrong?

Some states, unfortunately, offer state tax credits as a % of your gift to their specified charities instead of naming a dollar limit. In many cases, these credits are 25% or more.

It seems to me that this would make the QCD double-dip a non-starter, since the QCD would always be invalidated by any % state tax credit over 15%.

Are there workarounds in these cases?

Thank you.
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arcticpineapplecorp.
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Re: QCDs & State Tax Credits: a free lunch?

Post by arcticpineapplecorp. »

i thought these two articles gave good explainers (along with explaining and linking the IRS reg for the first link below):

https://www.marottaonmoney.com/qa-can-i ... x-credits/
https://www.merceradvisors.com/insights ... tribution/

does that answer it for you or no?
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Phil DeMuth
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Re: QCDs & State Tax Credits: a free lunch?

Post by Phil DeMuth »

Arcticpineapple --

Thank you, that is what I thought. It looks like we can do the QCD + tax credit when the credit is < 15% of the charitable donation, and there appears to be no way to do this in a state that offers a fixed % of the donation over 15% (unless someone in Bogleville has found a workaround).

It looks like the following states offer tax credits over the 15% of charitable contribution limit, disqualifying them from accepting QCDs:
  • Kentucky
    Maryland
    Missouri
    North Carolina
    North Dakota
    Virginia
There may be others.

If anyone has experience combining QCDs and state tax credits, I would love to hear how it went.

Thanks!!
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arcticpineapplecorp.
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Re: QCDs & State Tax Credits: a free lunch?

Post by arcticpineapplecorp. »

Phil DeMuth wrote: Sat May 27, 2023 11:40 am Arcticpineapple --

Thank you, that is what I thought. It looks like we can do the QCD + tax credit when the credit is < 15% of the charitable donation, and there appears to be no way to do this in a state that offers a fixed % of the donation over 15% (unless someone in Bogleville has found a workaround).

It looks like the following states offer tax credits over the 15% of charitable contribution limit, disqualifying them from accepting QCDs:
  • Kentucky
    Maryland
    Missouri
    North Carolina
    North Dakota
    Virginia
There may be others.

If anyone has experience combining QCDs and state tax credits, I would love to hear how it went.

Thanks!!
thanks for posting your question. I hadn't even considered qcds with regards to state returns, but i'm not (nor are any of my friends or family) in a state that's allows tax deductibility of qcds listed above so it wasn't an issue that was on my radar. But good to know and share for bogleheads who may be impacted. Thanks!
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Phil DeMuth
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Re: QCDs & State Tax Credits: a free lunch?

Post by Phil DeMuth »

The state tax credit maneuver increases the value of your charity dollar by your marginal state tax rate. In the first example above, the tax savings might go from 22% (Federal) to 26.2% (Federal + Arizona). The dollar savings may not be large, but a prudent, tax-efficient Boglehead will want to save on taxes where she can.

I believe the following states offer dollar-capped state tax credits for charitable distributions to their specially designated charities that would be susceptible to this maneuver:

• Arizona
• Indiana
• Iowa
• Mississippi
• Montana

Are there others? I would love to know.

Naturally, you have to follow all the state rules to make this work.
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celia
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Re: QCDs & State Tax Credits: a free lunch?

Post by celia »

Phil DeMuth wrote: Sat May 27, 2023 2:22 pm The dollar savings may not be large, but a prudent, tax-efficient Boglehead will want to save on taxes where she can.
Not really. The goal should to be to maximize your spendable money rather than save on taxes (although saving taxes can be part of how you increase your spendable money).

So, the suggestion is to give away thousands of dollars so you can save a hundred?. Does that make financial sense?

I would much prefer to support the charities I care about than what a state suggests.

Oh, and you have to be over age 70.5 to make a QCD and not get anything of financial value in return. Doesn’t a tax credit have financial value?
prd1982
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Re: QCDs & State Tax Credits: a free lunch?

Post by prd1982 »

I’m curious how the taxes work in these states (eg VA). Does the state normally treat the QCD as taxable income at the state level, and then give you a 15% deduction on the state income tax form? My state starts with the Federal AGI, so I’m getting the state deduction for a QCD but not for a regular charitable deduction.
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Phil DeMuth
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Re: QCDs & State Tax Credits: a free lunch?

Post by Phil DeMuth »

Celia --

Excellent points, thank you! I am assuming a charitable motive and a worthy charity at the state level.

As for being over 70 1/2, it's worse than that, since you can only subtract a QCD from your Federal taxes up to the amount of your RMD, and RMDs don't start until you are at least 72....

The whole point of being able to both get a state tax credit on your state income taxes as well as a QCD on your Form 1040 is that the IRS -- which normally disqualifies the entire charitable donation where there is anything of economic value received in exchange, and said that they will allow the entire QCD to stand so long as no more than 15% of it is credited back to you against your state taxes.

I'm raising this thread to see how it has worked for people and what the issues are.
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Re: QCDs & State Tax Credits: a free lunch?

Post by prd1982 »

Phil DeMuth wrote: Sat May 27, 2023 3:27 pm

As for being over 70 1/2, it's worse than that, since you can only subtract a QCD from your Federal taxes up to the amount of your RMD, and RMDs don't start until you are at least 72....
Not true. A QCD is not limited to your RMD. You can do a QCD at age 70.5. You can give up to $100K. The only relationship is that a QCD can count toward satisfying your RMD.
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Phil DeMuth
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Re: QCDs & State Tax Credits: a free lunch?

Post by Phil DeMuth »

prd1982 --

Virginia's tax credits cannot be used along with a QCD as far as I can see. The reason is VA pays back > 15% of your contribution in the form of a state tax credit. This crosses the IRS's threshold, which means the QCD would be disallowed and treated instead as an IRA withdrawal and taxed as ordinary income. The amount you donated (less the amount of the credit you received) would be eligible for a Schedule A tax deduction, but this is less of a good deal than the QCD would have been.

In your case, you can do a QDC and it would apply to both the Fed and VA taxes, but you gave it to a charity that did not issue you a Virginia tax credit. Because if you had, the QCD would have been disallowed because the tax credit % would have been too high and invalidated it. The ex-QCD would instead have been added to your AGI on both your Federal and state returns.

Note that the states are extremely particular that you comply with all their special rules in this regard.
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Phil DeMuth
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Re: QCDs & State Tax Credits: a free lunch?

Post by Phil DeMuth »

prd1982 --

Aha! So you are saying I can do a QCD up to $100,000 annually post-70 1/2, and the full amount disappears from my AGI on Form 1040.

Once my RMDs start, say at 72, I can count up to $100,000 of the QCD against my RMD. If my RMD is < $100,000, it's a wash; if my RMD is > $100,000, then only $100,000 of can be part of the QCD and the rest will show up as ordinary income.

Does that sound correct to you? Thank you for the clarification!
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Re: QCDs & State Tax Credits: a free lunch?

Post by HueyLD »

“ QCD Guidelines:

Taxpayers who make a QCD must be at least 70½ years old on the day of the distribution.

A QCD will count toward a required minimum distribution.

The taxpayer must have an acknowledgement of the contribution.

The amount of the QCD can't be more than the amount of the distribution that would count as income.

Declare the QCD as income to claim the charitable contribution as a deduction.

The maximum annual exclusion for QCDs is $100,000.

When filing a joint return, the spouse can also have a QCD and exclude up to $100,000.

Any QCD more than the $100,000 exclusion limit counts as income like any other distribution.

The amount of QCD contribution limits for exclusion reduce after age 70½.”

https://www.irs.gov/newsroom/seniors-ca ... -their-ira
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Phil DeMuth
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Re: QCDs & State Tax Credits: a free lunch?

Post by Phil DeMuth »

prd1982 -

But a QCD at age 70 1/2 seems to confer no immediate tax benefit, because in the alternative case the IRA could have sat untapped that year and the AGI would have been the same either way. Wouldn't you be better off donating appreciated securities from a brokerage account, or even writing a check to the charity, where you would get a Schedule A tax deduction?

You could argue that the pre-RMD QCDs would lower the balance of the IRA, lowering future RMDs and their taxes over the coming decades.

Otherwise, the only tax advantage from the QCDs seems to appear after RMDs start, as the QCD can eliminate these from your income up to $100,000.

Does this sound correct?

Thanks!
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Re: QCDs & State Tax Credits: a free lunch?

Post by prd1982 »

Phil DeMuth wrote: Sat May 27, 2023 6:33 pm prd1982 -

But a QCD at age 70 1/2 seems to confer no immediate tax benefit, because …

Does this sound correct?

Thanks!
I was just replying that you can do a QCD before you need to take an RMD, and that a QCD can exceed the RMD. Not saying it is better tax wise. Note that many people don’t have any taxable investments, so their only source of money is their IRA. In that case giving via a QCD is better than moving money from their IRA to their checking account, and writing a check. This is esp. true if taking the standard deduction.
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Phil DeMuth
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Re: QCDs & State Tax Credits: a free lunch?

Post by Phil DeMuth »

Note that many people don’t have any taxable investments, so their only source of money is their IRA. In that case giving via a QCD is better than moving money from their IRA to their checking account, and writing a check. This is esp. true if taking the standard deduction.
Yes -- thanks for clarifying. As Ed Slott points out, the IRA rules are the most complicated in the entire tax code, and have the worst penalties for trivial mistakes.
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Re: QCDs & State Tax Credits: a free lunch?

Post by prd1982 »

I got to thinking about giving appreciated shares vs.a QCD before you are required to take an RMD. Ignoring state rules, I don’t see how that is as good tax wise as doing a QCD.

If I do a QCD of 10k, it doesn’t count as income, but future RMDs will be smaller (as you mentioned). If I I need to later spend 10k, I can sell the appreciated stock. The tax will be less than pulling another 10k from my IRA. If I die just after the contribution, your heirs, assuming not a charity, would be happier if the 10k was in a taxable account vs. an IRA. I even see a QCD as better than using cash in your savings account. Cash will have the same federal tax as a QCD. However, with the QCD, you still have the 10k of cash you can spend on your taxable desires without tax implications. My state treats QCDs the same as the feds, so QCDs are the way to go.

Can you give me an example where the federal tax is better using appreciated stock rather than a QCD. I understand that giving appreciated stock is a way to unload undesirable stocks, but that isn’t the same as better for taxes than a QCD.
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Phil DeMuth
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Re: QCDs & State Tax Credits: a free lunch?

Post by Phil DeMuth »

Can you give me an example where the federal tax is better using appreciated stock rather than a QCD. I understand that giving appreciated stock is a way to unload undesirable stocks, but that isn’t the same as better for taxes than a QCD.
IMHO No - provided the QCD is counting towards your RMD.

Two factors make the QCD better than appreciated stock:

1) Capital Gains tax rates are almost invariably smaller than marginal tax rates, so less of a tax savings there.

2) Importantly, the QCD is not offset by the standard deduction, while Schedule A deductions are.

If the QCD were done before the RMDs commenced, it is possible that the appreciated securities would be a better choice -- provided that Schedule A overcame the hurdle of the standard deduction and the donor was in a bracket to benefit from the deduction. The benefit of the QCD in this case would lower the balance in the IRA from which future RMDs would be calculated. But -- these benefits would have to be discounted because they are all in the future, and might even go into to the next generation.
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Phil DeMuth
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Re: QCDs & State Tax Credits: a free lunch?

Post by Phil DeMuth »

One more thing -- some states that charge state income tax do not respect QCDs. While you might get a credit for the QCD on your Federal return, your state might treat it as a taxable distribution from your IRA! So this would have to be taken into account as well.

As far as I know, these states are:

• California
• Connecticut
• Illinois
• Indiana
• Massachusetts
• Michigan
• New Jersey
• New York
• Rhode Island

...but if anyone knows better I would love to hear.


My bad -- this list is wrong!! These are just states that do not allow charitable deductions. Pennsylvania would be another one, but PA does not tax IRA distributions at all so the issue never arises.

ChatGPT 4.0 confidently asserted, "California requires taxpayers to add back the amount of the QCD as taxable income on their state tax return. Therefore, California residents who make QCDs may need to pay state income tax on the distributed amount." But this is a hallucination!

The states above use the federal AGI as their starting point, so the QCD presumably would apply at the state level as well.

In fact, a QCD may be the only way to get a tax benefit for a charitable deduction in these states, since they don't like below-the-line Schedule A deductions or seem to offer any of their own.

I am very grateful to those of you who corrected this!
Last edited by Phil DeMuth on Mon May 29, 2023 3:24 pm, edited 1 time in total.
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Re: QCDs & State Tax Credits: a free lunch?

Post by tomd37 »

Phil - Any relation to same name at Conservative Wealth Mgmt?
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prd1982
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Re: QCDs & State Tax Credits: a free lunch?

Post by prd1982 »

Phil DeMuth wrote: Sun May 28, 2023 1:57 pm One more thing -- some states that charge state income tax do not respect QCDs. While you might get a credit for the QCD on your Federal return, your state might treat it as a taxable distribution from your IRA! So this would have to be taken into account as well.

As far as I know, these states are:

• California
• Connecticut
• Illinois
• Indiana
• Massachusetts
• Michigan
• New Jersey
• New York
• Ohio
• Rhode Island

...but if anyone knows better I would love to hear.
I believe Connecticut doesn’t tax QCDs. CT starts with the federal AGI, and makes no mention of QCDs. Since QCDs are not part of the AGI, they are not taxed.
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Re: QCDs & State Tax Credits: a free lunch?

Post by Charles Joseph »

The only free lunch is at the soup kitchen.
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Re: QCDs & State Tax Credits: a free lunch?

Post by McQ »

Phil DeMuth wrote: Sun May 28, 2023 1:57 pm One more thing -- some states that charge state income tax do not respect QCDs. While you might get a credit for the QCD on your Federal return, your state might treat it as a taxable distribution from your IRA! So this would have to be taken into account as well.

As far as I know, these states are:

• California
• Connecticut
• Illinois
• Indiana
• Massachusetts
• Michigan
• New Jersey
• New York
• Ohio
• Rhode Island

...but if anyone knows better I would love to hear.
Phil, you are scaring me. My California state income tax is a substantial portion of my total income tax burden. If I cannot use a QCD to reduce my state tax burden as well as my federal burden, a future QCD becomes much, much less interesting as a tax maneuver (future = I am not yet 70.5 or 73).

First thing I did on reading your post was to start searching: "Does California tax QCDs?" That proved a most unsatisfying search, although I did find multiple California universities promoting QCDs without any mention of a state tax liability, FWIW.

On to the FTB.CA.gov site, searching "QCD". Sigh. maybe I shouldn't have done it on my phone. But useful: I learned that the California tax code automatically conforms to section 408 of the IRC.

There must be some BH over 70.5, resident in California, who has taken a QCD at least three years ago (time for a deficiency notice to be issued). Was your QCD made subject to state tax?

QCDs were in my future before I read Phil's post. Now, maybe not so much.

Inquiring minds want to know.

Else, those better at searching the CA law books might post a link, to resolve the issue by supplying the statutory language.
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celia
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Re: QCDs & State Tax Credits: a free lunch?

Post by celia »

prd1982 wrote: Sun May 28, 2023 8:06 pm
Phil DeMuth wrote: Sun May 28, 2023 1:57 pm One more thing -- some states that charge state income tax do not respect QCDs. While you might get a credit for the QCD on your Federal return, your state might treat it as a taxable distribution from your IRA! So this would have to be taken into account as well.

As far as I know, these states are:

• California
• Connecticut
• Illinois
• Indiana
• Massachusetts
• Michigan
• New Jersey
• New York
• Ohio
• Rhode Island

...but if anyone knows better I would love to hear.
I believe Connecticut doesn’t tax QCDs. CT starts with the federal AGI, and makes no mention of QCDs. Since QCDs are not part of the AGI, they are not taxed.
Phil, Let's take a few minutes to understand QCDs, since I think you're assuming something that is not true. Here are 3 cases of how you can take a QCD:

1) Take the QCD before your RMD is complete
2) Take part of your RMD and put it in Taxable, take a QCD to finish the RMD and even include some additional money for a larger QCD, if you want. Take additional withdrawals, if you want, say, for Roth conversions.
3) Take all of your RMD (since you need it for spending) and put it in Taxable, then take out the QCD.
Each of these is possible to do and your taxes will be based on all your Traditional IRA withdrawals minus the withdrawals that were QCDs.

When you take a QCD for the first time, you probably have to ask the custodian to do it for you after they look up your birthdate, but then you can ask them to set it up so you can do it yourself online. Each donation to a different charity needs to be done separately so each will get their own check. I believe a few custodians will mail the check directly to the custodian, but most will make the check out to the charity (so you can't cash it) but mail it to you. That allows you to make a copy for your records or scan it. I would write "Please send me a written acknowledgement" and "Do not add me to any mailing lists" on the stub attached to the check before I made a copy. Then it is up to the taxpayer to get the check to the charity. I think it is a good idea that the check is sent to you, since it gives you a chance to see if the charity name and amount is correct. If the check gets lost in the mail, you will also know if it was on the trip to you or after you sent it along to the charity. The custodian can always void the check and issue a new one if any of these mishaps happened, which they did for us during covid.


As far as reporting this on your tax return, look at line 4 on the Form 1040. Line 4a will show all the distributions from your IRA for the year (regardless of you putting them in Taxable, making a QCD, converting to Roth, or withholding some for taxes). The info is reported to you on Form 1099-R from the applicable custodians. The total amount withdrawn from all your Tax-deferred IRAs will end up on line 4a. Your tax software will ask you lots of questions about your IRA and the things you did with the money. Take your time to understand the terminology and the questions so you answer them correctly. When you get done, the part that was QCD(s) will have been subtracted from the total withdrawals and the rest ends up on line 4b where it later combines with all your other incomes.

Note that the QCD is taken care of early on and has nothing to do with standard or itemized deductions, AGI, or any tax credits. The federal tax return doesn't care about it any more. The end.


As far as the state return, I assume most states (including CALIFORNIA) start with the numbers from the federal return and ignore all the QCD info that disappeared back when you were working on line 4 of the 1040. If you want to itemize donations given from your Taxable accounts or your Donor Advised Fund, you can add that to your itemized deductions, which may differ between federal and state. But there is nowhere on any state return where QCDs are mentioned, that I've ever heard of as long as I've been on Bogleheads! They were only considered on line 4 of the 1040.

Note that the voluntary contributions on your state tax return do not go to specific charities as far as I know. They go to causes that you might be interested in, but all the money for one cause is split up many ways, some going to various programs, to research, or to charities. None of these will send you an acknowledgement since they don't know your name and address and don't know what percentage of the "cause"'s money they received. They're not going to waste the donated money on mailings, especially if you are limited in the amount you can give to a cause.

Here is the list of California causes, so you can see what I'm referring to. At least for California, no charities are named.


McQ, We live in California and have been taking QCDs since age 70.5. There's nothing for you to worry about here.

edit to add:
The point that I'm trying to make is that QCDs are not eligible for tax credits in any state. The only financial benefit you can get from them is not paying taxes on the amount that is a QCD. You can't combine them with your regular donations or donations made on the previous year state tax return to help you qualify for a bigger tax credit. If the OP's original premise was true (that you can sometimes get a state tax credit on QCDs), we would have been discussing this for years on Bogleheads.
Last edited by celia on Mon May 29, 2023 2:20 pm, edited 1 time in total.
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Carl53
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Re: QCDs & State Tax Credits: a free lunch?

Post by Carl53 »

Phil DeMuth wrote: Sun May 28, 2023 1:57 pm One more thing -- some states that charge state income tax do not respect QCDs. While you might get a credit for the QCD on your Federal return, your state might treat it as a taxable distribution from your IRA! So this would have to be taken into account as well.

As far as I know, these states are:

• California
• Connecticut
• Illinois
• Indiana
• Massachusetts
• Michigan
• New Jersey
• New York
• Ohio
• Rhode Island

...but if anyone knows better I would love to hear.
Just tested this out for Ohio with TT and find that Ohio does not add QCDs back in.
prd1982
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Re: QCDs & State Tax Credits: a free lunch?

Post by prd1982 »

This thread has really become confusing, and inaccurate. Multiple items are being discussed.

First are state tax credits that some states provide. These are specific charities where a percentage of the donation are deducted from the state tax you owe. Clearly deducting 50% of your donation, for example, from your state tax bill is worth a lot more than a typical charitable donation. That is what this thread started about. The IRS has put out new rules that affected how these donations affect federal taxes.

These state tax credit donations should not be confused with run of the mill charitable donations. Regular donations affect your taxable income at the federal level. Many states also allow you to deduction your regular charitable deductions from the state taxable income. QCDs reduce your federal AGI, which also reduces your taxable income. If the state starts its tax calculations using the federal AGI, the QCD will reduce your state taxable income. The state tax code would have to explicitly add back in the QCD in order to tax it
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Phil DeMuth
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Re: QCDs & State Tax Credits: a free lunch?

Post by Phil DeMuth »

Carl53 -
Just tested this out for Ohio with TT and find that Ohio does not add QCDs back in.
Thank you for this! It turns out, the news is even better...

As of 2022, not only will Ohio accept a QCD, but Ohio offers a dollar-capped state tax credit for charitable contributions (i.e., QCDs) to Scholarship Granting Organizations. Here is their list:

https://charitable.ohioago.gov/Scholars ... ation/List

The tax credit is tapped at $750 per taxpayer. In the case of a MFJ couple, each partner could take the credit, but each would have to make their own QCD from their own IRA.

It looks to me that if the QCD were $5,007, the state tax credit received would be < 15% of this, and so the Ohio donor could both receive a state tax credit for $750 as well as apply the entire QCD on Form 1040 -- the best case scenario.

As a result, Ohio goes off the "bad" list and on to the "good" list for the state tax credit free lunch.
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Phil DeMuth
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Re: QCDs & State Tax Credits: a free lunch?

Post by Phil DeMuth »

McQ --
the California tax code automatically conforms to section 408 of the IRC.
If so, then all should be well: CA would not tax QCDs as ordinary income distributions from an IRA.

Unsurprisingly, there are definitively stated opinions both ways on the Internet.

There must be Bogleheads in CA who have been down this road and can weigh in...
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Phil DeMuth
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Re: QCDs & State Tax Credits: a free lunch?

Post by Phil DeMuth »

prd1982 --
Connecticut doesn’t tax QCDs
Thank you for this. I believe this is correct. While QCDs are not explicitly included or excluded, CT "generally" accepts the federal AGI as its starting point.

What's interesting is that CT explicitly excludes Schedule A below-the-line charitable deductions. That suggests that the QCD is a "backdoor" way of getting an otherwise unobtanium charitable deduction on CT taxes that cannot be had any other way, e.g., by a Schedule A charitable deduction or as an itemized deduction on the CT state tax form.
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Phil DeMuth
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Re: QCDs & State Tax Credits: a free lunch?

Post by Phil DeMuth »

celia --

Thank you for your comments!
1) Take the QCD before your RMD is complete
2) Take part of your RMD and put it in Taxable, take a QCD to finish the RMD and even include some additional money for a larger QCD, if you want. Take additional withdrawals, if you want, say, for Roth conversions.
3) Take all of your RMD (since you need it for spending) and put it in Taxable, then take out the QCD.
Each of these is possible to do and your taxes will be based on all your Traditional IRA withdrawals minus the withdrawals that were QCDs.
One thing to keep in mind here is that the first money out of an IRA during a year when a RMD is due always counts toward the RMD.

Some people have IRAs with RMDs due that they do not need for consumption and that they do not wish to take out due to the tax implications. They would rather do a QCD to keep the RMD out of their adjusted gross income. And the only way to assure this is by doing the QCD first up to the amount of the RMD.

In other words, if I have to take out a $100 RMD this year and do not want another $100 in ordinary income, my first withdrawal should be a $100 QCD. That satisfies my RMD.

If instead I start by doing a $100 Roth conversion or a $100 withdrawal to taxable, either way I will have another $100 in AGI to report. If I do a $100 QCD after that, it does not wipe out the taxes owed from the first $100 withdrawal. It only erases itself.
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celia
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Re: QCDs & State Tax Credits: a free lunch?

Post by celia »

Phil DeMuth wrote: Mon May 29, 2023 11:13 am Carl53 -
Just tested this out for Ohio with TT and find that Ohio does not add QCDs back in.
Thank you for this! It turns out, the news is even better...

As of 2022, not only will Ohio accept a QCD, but Ohio offers a dollar-capped state tax credit for charitable contributions (i.e., QCDs) to Scholarship Granting Organizations. Here is their list:

https://charitable.ohioago.gov/Scholars ... ation/List

The tax credit is tapped at $750 per taxpayer. In the case of a MFJ couple, each partner could take the credit, but each would have to make their own QCD from their own IRA.

It looks to me that if the QCD were $5,007, the state tax credit received would be < 15% of this, and so the Ohio donor could both receive a state tax credit for $750 as well as apply the entire QCD on Form 1040 -- the best case scenario.

As a result, Ohio goes off the "bad" list and on to the "good" list for the state tax credit free lunch.
Phil, What do you mean by a state "accepts a QCD"? By starting with the federal AGI, that already implies it "accepts" what the IRS allows, unless it makes adjustments for specific things. For example, your state tax can be deducted on your federal return, if you itemize, but when you get to the state return, it will be added back in if you itemized it federally.

Can you share a link to Ohio's tax code that they give a tax credit for some QCDs but not others (which you seem to be saying)?
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Re: QCDs & State Tax Credits: a free lunch?

Post by arcticpineapplecorp. »

Charles Joseph wrote: Sun May 28, 2023 8:27 pm The only free lunch is at the soup kitchen.
it's not free. someone had to pay for it. just not the person enjoying the soup.
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prd1982
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Re: QCDs & State Tax Credits: a free lunch?

Post by prd1982 »

celia wrote: Mon May 29, 2023 2:43 pm

Can you share a link to Ohio's tax code that they give a tax credit for some QCDs but not others (which you seem to be saying)?
Not Phil, but let me try to explain why this thread is so confusing.

From my research, Ohio does allow all QCDs, and does not tax them. Ohio does not allow a deduction for regular charitable contributions to reduce the state AGI. What Ohio does allow is a special deduction for gifts to certain charities. This deduction isn’t a reduction of the state AGI used to calculate the tax owed. Rather, it directly reduces the state tax owed. So If you give $50 to one of these charities, it reduces your state tax by $50. The max you can deduct is $750. Obviously you can also deduct the gift on your federal return, assuming you itemize.

Now what happens if you make a $750 QCD to the charity? At the federal level, you get the benefit of reducing your AGI, which gives the effect of a deduction. At the state level you also get a benefit because the AGI is reduced. It also sounds like you also get to deduct the $750 from the amount you owe. Not sure It this is true.

What the IRS ruled was that if you get one of these special deductions, and it is more than 15% of what you gave, you must reduce your federal charitable deduction by the amount of the state taxes that were eliminated by this gift. That is, you got something in return for the gift. So if Ohio gave you a 50% deduction on your state tax, you would have to reduce your federal deduction by 50%. If you did this by a QCD, the QCD is not allowed since you are not allowed to get anything for a QCD.

Finally, the IRS said that the state reduction of taxes owed by this type of procedure counts toward the 10k SALT.

Hope this explains it. None of this applies to regular charitable gifts that most of us are used to.


Added:

* if you give $1,500, you only get a $750 state tax reduction, so you could claim $750 charitable deduction; you could not use a QCD.

* if you give $5,357, you still get a $750 state tax deduction. Since that is a 14% deduction, you can claim the full give as a charitable deduction. You could also make the gift as a QCD. Not sure if the double benefit of reduced State AGI a plus special state tax reduction exceeds the 15%.
Last edited by prd1982 on Mon May 29, 2023 3:45 pm, edited 1 time in total.
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Phil DeMuth
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Re: QCDs & State Tax Credits: a free lunch?

Post by Phil DeMuth »

celia wrote: Mon May 29, 2023 2:43 pm
Phil DeMuth wrote: Mon May 29, 2023 11:13 am
Can you share a link to Ohio's tax code that they give a tax credit for some QCDs but not others (which you seem to be saying)?[/b]
Hi Celia --

Try this:

https://tax.ohio.gov/individual/resourc ... ion-credit

I *think* this is the only charitable tax credit Ohio offers.
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Re: QCDs & State Tax Credits: a free lunch?

Post by Charles Joseph »

arcticpineapplecorp. wrote: Mon May 29, 2023 2:57 pm
Charles Joseph wrote: Sun May 28, 2023 8:27 pm The only free lunch is at the soup kitchen.
it's not free. someone had to pay for it. just not the person enjoying the soup.
I pray they are enjoying it, since they had to go to a soup kitchen to get it.
"The big money is not in the buying and selling, but in the waiting." - Charles Munger
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Phil DeMuth
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Re: QCDs & State Tax Credits: a free lunch?

Post by Phil DeMuth »

Ed Slott's website says, "Some states require a donor to add back the entire QCD amount and include it as income, thus allowing zero QCD deductions at the state level (i.e., New Jersey, which uses a gross income tax)." This is from 2019, but I cannot find anything that says otherwise. This has nothing to do with state tax credits, just QCDs in general.
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Re: QCDs & State Tax Credits: a free lunch?

Post by celia »

prd1982 wrote: Mon May 29, 2023 3:12 pm From my research, Ohio does allow all QCDs, and does not tax them. Ohio does not allow a deduction for regular charitable contributions to reduce the state AGI.
All the QCDs are reported on the federal return. The regular donations are also reported on the federal return if the taxpayer itemizes deductions and has enough deductions in total to be more than the standard deduction. In other words, other donations may or may not be reported federally. From there the AGI goes to the state returns, where the states can make their own adjustments.
What Ohio does allow is a special deduction for gifts to certain charities. This deduction isn’t a reduction of the state AGI used to calculate the tax owed. Rather, it directly reduces the state tax owed.
The only charitable donation I see that impacts Ohio taxpayers is the Scholarship donation to selected organizations, for which there might be a tax credit you might qualify for. It is not a deduction but rather a tax credit which you only get if you still have some tax liability remaining as it is a refundable credit.
So If you give $50 to one of these charities, it reduces your state tax by $50. The max you can deduct is $750. Obviously you can also deduct the gift on your federal return, assuming you itemize.
In that case it already carries oner to the Ohio tax return as part of a lower AGI (rather than being deducted again).
Now what happens if you make a $750 QCD to the charity? At the federal level, you get the benefit of reducing your AGI, which gives the effect of a deduction. At the state level you also get a benefit because the AGI is reduced. It also sounds like you also get to deduct the $750 from the amount you owe. Not sure It this is true.
QCDs can only be given to organizations designated as a 501(c)(3) by the IRS. [It is the taxpayer’s responsibility to confirm the tax status of the organization.]

The Ohio Scholarhip Granting Organizations need to be a 501(a). Thus, a QCD can’t benefit one of these scholarship organizations.


https://charitable.ohioago.gov/Scholars ... tification

Here’s how you can determine the tax status of each organization:

https://www.irs.gov/newsroom/heres-how- ... deductible

And here is general info on making donations:
https://www.irs.gov/pub/irs-pdf/p526.pdf


What the IRS ruled was that if you get one of these special deductions, and it is more than 15% of what you gave, you must reduce your federal charitable deduction by the amount of the state taxes that were eliminated by this gift. That is, you got something in return for the gift. So if Ohio gave you a 50% deduction on your state tax, you would have to reduce your federal deduction by 50%. If you did this by a QCD, the QCD is not allowed since you are not allowed to get anything for a QCD.
This makes sense because donations aren’t supposed to benefit you, just the charity. Can you imagine people getting richer the more they gave away?


My main goal here is to dispute Phil’s reasoning that you can benefit from QCDs from more than not having to pay taxes on the withdrawal as I’ve never heard of that. Phil, please look at the type of organization each “charity” is. And donate to causes you care about instead of how you might be able to double-dip.

— got to go drop off more food at the soup kitchen now . . .
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Phil DeMuth
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Re: QCDs & State Tax Credits: a free lunch?

Post by Phil DeMuth »

celia wrote: Mon May 29, 2023 7:01 pm
QCDs can only be given to organizations designated as a 501(c)(3) by the IRS. [It is the taxpayer’s responsibility to confirm the tax status of the organization.]

The Ohio Scholarhip Granting Organizations need to be a 501(a). Thus, a QCD can’t benefit one of these scholarship organizations.

Hi Celia --

I opened the web page and picked the first Scholarship Granting Organization my eye fell upon: The Northwest Ohio Scholarship Fund.

NORTHWEST OHIO SCHOLARSHIP FUND INC
SYLVANIA, OH 43560-2207 | TAX-EXEMPT SINCE JUNE 1999
EIN: 31-1639134
Classification (NTEE)
Scholarships, Student Financial Aid Services, Awards (Educational Institutions and Related Activities)
Nonprofit Tax Code Designation: 501(c)(3)

You are right -- it would be very interesting if Ohio's list of "charities" were in fact not public charities! But this one is, and it leads me to believe that many of them are.

The states that offer tax credits all differ. Some only promote narrow causes that might not tug at your heartstrings. Others have a wide range of offerings where a charitably-motivated individual might find something that like.

It is unusual to get a state tax credit in exchange for QCD, which is why I opened this thread. I would love to be proved wrong, but it looks to me like this is a "thing."

Thanks for your interest and perseverance!
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Re: QCDs & State Tax Credits: a free lunch?

Post by calwatch »

Since I was searching for QCDs and saw California mentioned, there is only one California charity which qualifies for a tax credit, which is the College Access Fund, offering 50% credit off state taxes for the tax year when the credit is claimed (with the tax year period extending until January 2 of the following year to allow for a brief window of arbitrage if necessary). The operator of the fund explicitly states that QCDs are permitted to be donated: https://www.treasurer.ca.gov/cefa/catc/fact-sheet.pdf , however, the only way funds can get there is by money order, cashier's check, or ACH debit, which may be a problem for some IRA custodians.
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